Not for the squeamish: Making a case for alternative private investments in Nigeria

Nigeria made news earlier this summer after officially beginning a recession, with GDP dropping 2.06% this year in response to plummeting oil prices, the U.S. Federal hike and China’s economic slowdown. The emerging nation has its hands full as businesses fight to recover, but has high hopes that the economic downturn will serve as a catalyst for industrial diversification and a reorganization of resources that will result in Nigeria emerging stronger and more prosperous than ever before.

President Muhammadu Buhari, on August 19th, announced that the Nigerian government will allocate 1.8 trillion naira, or $5.8 billion in the 2016 budget for capital projects this year. This and other government action aimed at increasing housing and infrastructure projects, creating more reliable sources of power, and reducing wasteful spending work hand in hand with the private sector’s own initiatives to increase entrepreneurial activity. Together, the goal is to diversify the industries that support the Nigerian economy, move away from reliance on the oil market, and bring the country into the top 20 global economies by 2020.

As a result of this activity, there has been an increase in investor interest in the country – while this influx of capital is a net positive for small business, the banking sector within Nigeria has remained limping behind.

“Nigeria is now a roughly $400 billion economy with a sub-$100 billion banking system – it’s very much underbanked and underlevered. Alternative capital provisions and providers are needed and they make sense. You need the right partner to help you navigate that market properly. The opportunities, the returns to capital, and the pent up demand are all there,” said Babawole Akin-Aina of AO Advisors. “The opportunities are readily apparent when you look at how lopsided the current situation is: Nigerian banks are overexposed to oil and gas and will need to reduce their sector allocation; about 26% of credit is related to energy, though only 11% of Nigerian GDP is contributed from it. They will need to reallocate and this creates opportunities for a variety of investors.”

The opportunities are quite impressive. “Our conservative estimate is that the opportunity set for USD denominated bank debt on Nigerian bank balance sheets is in the range of $5 billion, which is about 30% of outstanding exposure of Oil and Gas.”

That impressive amount of money is badly needed in developing industries, from the quickly expanding mobile sector – Nigeria has over 107% telephone penetration, and almost a third of the population owns a smartphone – to the industries that greater accessibility and internet connectivity affect, especially retail. “The Nigerian consumer is a massive market. There are over 170 million people in the country, and over 70% of them are under thirty years old,” comments Akin-Aina. “You have over 15 million people on Facebook, so they understand and are aware of what global consumption trends are. Fast moving consumer goods, from fashionable food stuffs to detergent to personal luxuries, have an intrinsic demand that is not going away. Nigerians want similar products as to what they see their peers consuming all over the world. Global brands are at a premium and very appreciated, and not all of them have moved into Africa yet.”

Akin-Aina sees an incredible amount of potential in alternative private investments in Nigeria, as entrepreneurship spikes past the capabilities of the current outdated system. As with any emerging market, there are some precautions that must be considered before diving in, namely that the country has yet to develop a fully mature bankruptcy paradigm, which can make negotiated exits tricky. He recommends pairing a highly vetted legal team with a financial advisor that is highly familiar with not only the investor’s nation’s laws, but also Nigeria’s legal system, economy and industries.

Babawole Akin-Aina is a managing partner at AO Advisors, a financial advisory and principal investing firm focused on Nigeria and Sub-Saharan Africa. He has been involved in Credit and Value investing for over a decade, and has worked at Guggenheim Partners, Deutsche Bank, Soros Fund Management among other firms. He pairs his financial and investment expertise with his familiarity and ties in East and South Africa to uncover opportunities for investment and partnership that create holistic, long-term, high value relationships. OnFrontiers has partnered with AO Advisors to offer comprehensive, holistic investment resources to those interested in emerging East and South African markets.